Gentherm Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2026

Key Takeaways

  • Positive Sentiment: Gentherm raised full-year 2026 guidance for revenue, adjusted EBITDA, and adjusted free cash flow after a strong first half. Management said it now expects revenue of about $1.6 billion at the midpoint, implying roughly 5% growth despite an expected decline in light vehicle production.
  • Positive Sentiment: Second-quarter results exceeded expectations, with revenue up 11% year over year to a quarterly record of $416 million and adjusted EPS rising 39% to $0.75. Automotive Climate and Comfort Solutions outperformed broader vehicle production, and the company said its auto new business awards totaled about $690 million in the quarter and more than $1 billion year to date.
  • Positive Sentiment: Management highlighted momentum beyond automotive, including new home and office wins and the FDA 510(k) clearance for ThermAffyx, a new medical product expected to begin initial sales in the third quarter. Gentherm also completed the acquisition of Innovative Medical Equipment (IME), which it sees as a strategic fit with strong cross-selling potential.
  • Neutral Sentiment: Profitability improved operationally but was partially offset by one-time and timing-related headwinds. Adjusted EBITDA margin was 11.7%, down slightly year over year, due to inflation recovery timing, inventory reductions, and warranty accruals in automotive and medical; management said those warranty charges should not be viewed as a recurring run-rate issue.
  • Positive Sentiment: The Modine Performance Technologies merger remains on track, with closing now expected early in the fourth quarter. Gentherm said the combined company would be more diversified, could exceed $3.5 billion in revenue by 2030, and expects to generate over $1 billion of cumulative unlevered free cash flow through 2030.
AI Generated. May Contain Errors.
Earnings Conference Call
Gentherm Q2 2026
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Greetings, welcome to Gentherm's second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If any of you require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I'll now turn the conference over to Gregory Blanchette, Senior Director of Investor Relations. Thank you. You may begin.

Gregory Blanchette
Gregory Blanchette
Senior Director of Investor Relations at Gentherm

Thank you, good morning, everyone, thanks for joining us today. Gentherm's earnings results were released earlier this morning, a copy of the release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the investor relations section of Gentherm's website. During this call, we will make forward-looking statements within the meaning of federal securities laws. These statements reflect our current views with respect to future events and financial performance, actual results may differ materially. We undertake no obligation to update them except as required by law. Please see Gentherm's earnings release and its SEC filings, including the latest 10-K and subsequent reports for discussions of our risk factors and other significant assumptions, risks, and uncertainties underlying such forward-looking statements. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G.

Gregory Blanchette
Gregory Blanchette
Senior Director of Investor Relations at Gentherm

Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and investor presentation. On the call with me today are Bill Presley, President and Chief Executive Officer, Jon Douyard, Chief Financial Officer. During their comments, they will be referring to a presentation deck that we've made available on the investor section of Gentherm's website. After the prepared remarks, we'd be pleased to take your questions. I'd like to turn the call over to Bill.

Bill Presley
Bill Presley
President and CEO at Gentherm

Thank you, Greg, good morning, everyone. Let's begin on slide three for an update on our business and the market. Strong commercial execution, where we continue to significantly outperform the market, combined with operational discipline, resulted in an excellent first half, positioning Gentherm to deliver a solid year. Based on this performance, we are raising our full-year 2026 guidance. We continue to monitor the macroeconomic and geopolitical environment, at the same time, we are proactively managing inflationary pressures through disciplined commercial actions and operational execution. As we look ahead, our priorities remain clear. We are focused on executing our strategy, capitalizing on the opportunities within our control, driving sustainable, profitable growth for our shareholders. Strategic profitable growth is a cornerstone of our strategy, we continue to achieve critical milestones that position us for long-term success.

Bill Presley
Bill Presley
President and CEO at Gentherm

We have confidence that Gentherm's automotive business will grow over market while we continue to build momentum beyond the light vehicle market. During the quarter, Gentherm products were selected by two leading North American-based furniture brands in the home and office market. In less than a year, we have successfully deployed our core technologies with five new customers and have visibility to $50 million-$100 million of revenue in this market by 2028. A strong proof point that our technology platforms are readily transferable beyond automotive, and that we are moving with speed to capture these opportunities. In the medical market, we remain focused on refreshing the product portfolio and expanding our customer commercial channels. I am pleased to announce that we have received FDA 510(k) clearance for ThermAffyx, an innovative new solution developed by leveraging our proven automotive technology and intellectual property.

Bill Presley
Bill Presley
President and CEO at Gentherm

This is another powerful example of our ability to transfer differentiated automotive innovations into new markets where they solve meaningful customer challenges. Our patented solutions combine conductive air-free patient warming with securement technology to help prevent both hypothermia and patient movement during robotic surgical procedures. We are actively commercializing ThermAffyx and expect initial sales in the third quarter. As adoption grows, we believe ThermAffyx has the potential to establish a new standard of care while further validating the scalability of our technology platforms. On July 1st, we completed the strategic acquisition of Innovative Medical Equipment. INE is the provider of the ThermaZone Therapy device, which is a non-opioid thermal therapy solution designed to support pain management and recovery through controlled hot and cold therapy utilizing thermal electric devices.

Bill Presley
Bill Presley
President and CEO at Gentherm

It is a great example of a strategic, disciplined, bolt-on acquisition that accelerates our strategy. This acquisition builds upon our market-leading capabilities in thermal management while expanding our patient product portfolio. INE has a strong growth trajectory and broad reach into Veterans Administration hospitals and clinics, enabling attractive cross-selling opportunities of our combined thermal management portfolio. Please turn to slide four, where I will discuss some of our second quarter highlights. The Gentherm team delivered a solid second quarter, reflecting the consistent execution of our strategy and reinforcing our confidence in the path we are on. We secured approximately $690 million in automotive new business awards during the quarter, bringing our year-to-date total to more than $1 billion. These awards were in line with our expectations and reflect continued customer demand for our differentiated technologies.

Bill Presley
Bill Presley
President and CEO at Gentherm

Just as important, our pursuit pipeline remains healthy, giving us confidence that 2026 will be another robust year for new business awards. Product revenue reached a quarterly record of $416 million, driven by Automotive Climate and Comfort Solutions growth that continued to outpace underlying light vehicle production. This performance exceeded our expectations and demonstrates the value we continue to create through differentiated technologies and disciplined commercial execution. Operationally, we continued to build momentum in the second quarter. Our initiatives to improve labor efficiency, equipment utilization, and inventory management are delivering measurable results, while the operating system we are implementing is driving greater rigor, consistency, and accountability across the organizations. These improvements are strengthening our foundation to expand margins, positioning us to deliver higher cash flow conversion over time. Overall, we are executing well across the business.

Bill Presley
Bill Presley
President and CEO at Gentherm

We are winning with customers, improving the quality of our operations, and investing in the capabilities that will support profitable growth. Moving to slide five. As we approach the close of our combination with Modine Performance Technologies, I am increasingly confident in the strategic value this transaction will create. Together, we are building a fundamentally stronger company, one with greater scale, broader capabilities, and a more diversified portfolio positioned to deliver sustainable long-term growth. This combination transforms Gentherm into a global leader in thermal and precision flow management solutions. By bringing together two highly complementary businesses, we significantly expand our product portfolio of mission-critical technologies, strengthen our innovation capabilities, and create a platform with greater opportunities to serve our customers across a broader range of applications. Equally important, this transaction meaningfully diversifies our end market exposure.

Bill Presley
Bill Presley
President and CEO at Gentherm

Our light vehicle mix will decrease from approximately 97% today to roughly 63% while expanding our presence in attractive growing markets such as commercial vehicle, off-highway, and power generation. This creates a more balanced business with multiple growth engines. The combined company will have a clear path to exceed $3.5 billion in revenue by 2030 with an attractive financial profile supported by margin expansion, robust cash flow generation, and disciplined capital allocation. Together, these strengths position us to invest in future growth, realize the benefits of the combination, and create long-term value for our shareholders. I am excited about what lies ahead. The strategic rationale for this combination is compelling. Our integration planning is progressing well, and we believe the combined company will be better positioned than ever to deliver differentiated solutions for customers and superior returns for shareholders.

Bill Presley
Bill Presley
President and CEO at Gentherm

I will now hand it over to Jon to discuss an update on our integration activities and highlights for the quarter.

Jon Douyard
Jon Douyard
CFO at Gentherm

Thanks, Bill. Now turning to slide six. Since our last update, we have continued to work closely with the Modine team and have made significant progress toward the closing of the merger. Our primary focus is to ensure Performance Technologies can operate as a standalone division of Gentherm on day one, and that we are positioned to deliver on value creation opportunities. Based on progress to date, we expect closing of the transaction to occur early in the fourth quarter, as we have completed many key sign-to-close deliverables and expect to close out the remaining items in the coming months. As Bill noted, we remain excited about the combined business, and we'll continue to keep you updated as we approach closing. Please turn to slide seven for a review of the second quarter financials.

Jon Douyard
Jon Douyard
CFO at Gentherm

Revenue of $416 million was up 11% compared to the same period last year. Revenues excluding foreign currency translation increased 9.5%, exceeding our expectations, driven by higher automotive volumes. Automotive Climate and Comfort Solutions revenue increased 14.1% year-over-year, or 12.7% ex FX, and included strong outperformance across all regions and product categories. From a product perspective, Lumbar and Massage Comfort Solutions delivered another strong quarter of revenue growth at 38% year-over-year. Geographically, China performed well once again with trends from recent quarters continuing, including production increases from domestic Chinese OEM program launches and higher take rates from global OEM customers.

Jon Douyard
Jon Douyard
CFO at Gentherm

Turning to profitability, we delivered $48.8 million of adjusted EBITDA, or 11.7% of sales, compared to 12.2% in the second quarter of last year. Strong operating leverage and benefits from operational excellence initiatives were offset by anticipated headwinds related to inflation recovery timing and planned footprint-related inventory reductions, as well as warranty accruals in both our automotive and medical businesses. On a reported GAAP basis, diluted earnings per share were $0.14 in the quarter. This was impacted by approximately $0.55 per share related to merger and restructuring expenses. Adjusted diluted earnings per share were $0.75, up 39% compared to $0.54 per share in the second quarter of last year. Adjusted free cash flow was approximately $16 million year-to-date, in line with our expectations and historical seasonality, while CapEx was $14 million.

Jon Douyard
Jon Douyard
CFO at Gentherm

Down $9.5 million compared to the prior year as we continue to scrutinize spend. Moving to the balance sheet, we ended Q2 with net leverage of 0.3 turns, and we have liquidity of $502 million. Please turn to slide eight where I will discuss our 2026 guidance, which excludes any impact related to our planned combination with Modine Performance Technologies. Given our strong first half performance and second half revenue visibility, we are raising our 2026 full-year guidance for revenue, adjusted EBITDA, and adjusted free cash flow. At the midpoint, we expect revenue of $1.6 billion, representing roughly 5% growth for the year compared with a decline in light vehicle production forecasts of approximately 3%, positioning us to deliver mid to high single-digit revenue growth over market. We expect adjusted EBITDA to be in the range of $185 million-$200 million, implying a midpoint margin of approximately 12%.

Jon Douyard
Jon Douyard
CFO at Gentherm

As previously discussed, we expect margins to remain lower in the third quarter before rebounding in Q4. Turning to cash, we estimate adjusted free cash flow between $85 million and $100 million with CapEx in the range of $45 million-$55 million, or approximately 3% of sales. Overall, we delivered strong first half results and are pleased to raise guidance for the full-year. Our recent trends indicate that Gentherm is at an inflection point for growth. We will continue to execute with discipline while remaining focused on strategic actions to drive long-term value. Now let's turn to slide nine. Before turning it back to Bill, I'd like to reinforce our financial flexibility and strength, which supports a disciplined and balanced approach to capital deployment.

Jon Douyard
Jon Douyard
CFO at Gentherm

In the quarter, we secured $800 million of committed financing through the combination of a $550 million five-year revolving credit facility and a $250 million term loan that supports the Modine transaction. Upon closing, we expect our net leverage ratio to be approximately one turn, providing ample liquidity to deliver on our strategy. Our target is to maintain a net leverage ratio of one to one and a half times over time. In addition, we expect that the combined Gentherm and Modine business will generate significant cash flow in the coming years. Based on the forecast supporting our 2030 financial targets, we would expect to generate over $1 billion of cumulative unlevered free cash flow through 2030. We believe we have the necessary capacity to execute the Modine merger, support the combined business, and efficiently deploy capital to drive shareholder returns.

Jon Douyard
Jon Douyard
CFO at Gentherm

As we think about priorities, first, we will invest organically with a focus on return-driven investments that will drive profitable growth or expand margins. Second, we remain committed to returning capital to shareholders through repurchases, particularly in times of value dislocation. Earlier today, we announced a new stock repurchase authorization of up to $400 million over three years. This authorization, which is nearly three times our previous program, reflects our confidence in the cash generation of the combined company and provides additional capacity to opportunistically return capital to shareholders. It is our current expectation that we will be repurchasing shares upon the closing of the Modine transaction. Lastly, we believe that M&A will serve an important role for the company in achieving our strategic growth priorities.

Jon Douyard
Jon Douyard
CFO at Gentherm

We continue cultivating a wide range of opportunities that are aligned with our core technology platforms and attractive growth markets outside of light vehicles. While at the low end of our targeted range, our recent acquisition of IME is a great example. From a strategic perspective, IME brings highly complementary products, technology, and commercial channels, as well as needed scale to Gentherm's medical business. IME also brings an attractive financial profile with projected 2026 full-year revenue of approximately $17 million and 20% EBITDA margins. As part of Gentherm, we believe that IME can double its revenue and reach at least high teens ROIC by 2030, with returns covering cost of capital by year two. Moving forward, we will continue to target M&A opportunities that are strategically and financially compelling as a lever to accelerate our strategy and enhance returns.

Jon Douyard
Jon Douyard
CFO at Gentherm

In summary, the combination of a strong balance sheet, significant free cash flow generation, and a disciplined approach to capital deployment positions Gentherm to simultaneously invest for growth and return capital to shareholders, all while continuing to operate in a comfortable leverage framework. We believe this ultimately results in substantial long-term value creation for our shareholders. I'll now hand it back to Bill for some closing remarks.

Bill Presley
Bill Presley
President and CEO at Gentherm

Thanks, Jon. I am pleased with the progress we have made in the first half of the year and even more excited about the opportunities that lie ahead. We are executing our strategic priorities, improving the performance of our operations, and continuing to strengthen the foundation of the business. Every quarter, we make tangible progress that reinforces our confidence in the strategy we have in place. Looking forward, we remain focused on disciplined execution, profitable growth, and creating long-term value for our shareholders. With the momentum in our core business, the expansion of our technology into new markets, and the transformational combination with Modine Performance Technologies. We are building a fundamentally stronger company, one that is more diversified, more resilient, and better positioned to deliver growth, margin expansion, and increased cash flow.

Bill Presley
Bill Presley
President and CEO at Gentherm

I am confident that we have the right strategy, the right team, and the right capabilities to capitalize on the opportunities ahead and deliver value for our customers, our employees, and our shareholders. With that, I will turn the call back to the operator to begin the Q&A session.

Operator

Thank you. With that, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group. Please proceed with your question.

Ryan Sigdahl
Ryan Sigdahl
Analyst at Craig-Hallum Capital Group

Hey, good morning, Bill, Jon. Nice job.

Bill Presley
Bill Presley
President and CEO at Gentherm

Morning, Ryan.

Ryan Sigdahl
Ryan Sigdahl
Analyst at Craig-Hallum Capital Group

Good to see the company stacking good quarters and execution on top of each other here. Want to start with the core auto business. Really nice auto awards in the quarter, all-in outperformance. Curious if there are any key programs or product categories to call out within those auto awards, then how you feel about the RFP and kind of active pipeline that you guys are bidding on right now.

Bill Presley
Bill Presley
President and CEO at Gentherm

Yeah, I would say, Ryan, the awards were pretty well distributed. I wouldn't call out any specific region, program, or customer that really drove it. I think the commercial team on the auto side did a really nice job of texturing some broad wins there. Actually, it was exactly what we expected. If you remember when we talked, there was some conversation around Q1. Was that too light? We told you, "Don't worry, we have a good pipeline." We remain confident in the second half, still looks like another robust year for awards.

Ryan Sigdahl
Ryan Sigdahl
Analyst at Craig-Hallum Capital Group

That's great. Switching to medical IME acquisition. I don't believe I saw or heard, but what was the purchase price of that or terms around that? Then, Jon, just to be clear, the 2026, that's a full-year, $17 million, 20%, right? Assume half that for back half.

Jon Douyard
Jon Douyard
CFO at Gentherm

Yeah. The purchase price is $34 million. As we look at the transaction, it's a $17 million growth business today, obviously pro forma for the year. We expect significant growth as we talked about the business doubling here over the next couple of years. We really like the growth profile of the business and how it fits internally. Profitability, 20% EBITDA with opportunity to expand from that perspective as well. Will contribute in the second half of the year contemplated and what we put out from a guidance perspective. Really think it's a good fit for where the medical business is and what it needs to scale and grow here.

Ryan Sigdahl
Ryan Sigdahl
Analyst at Craig-Hallum Capital Group

As it relates to ThermAffyx, the commercial launch underway, any early demand metrics, indications, anything you can share, kind of what you've seen thus far from the market for that product. I know you mentioned complementary sales channel distribution, but does IME add anything from a revenue synergy potential, just from whether it's sales distribution or customers or anything that kind of accelerates potentially what you were previously expecting from ThermAffyx and your core medical business?

Bill Presley
Bill Presley
President and CEO at Gentherm

Yeah. On the ThermAffyx side, as said before, 510(k) clearance, all good. We are now producing. We are in the clinical trial period. We are in the process of getting ready to ship to hospitals, over 50, as we talked about before with the clinical trials. We're excited. Demand looks strong. Everybody's excited about the product. They like the problems that it solves that they currently have in that space. We're very optimistic on that one. I think the great thing about IME, to put it into perspective, IME does hot-cold therapy utilizing thermoelectric devices, which is kind of the core of how our business was born, if you remember. IME is largely in the Veterans Health Administration hospitals and clinics. IME serves over 200 Veterans Health Administration hospitals and clinics, and they had almost zero channel access to where we are today.

Bill Presley
Bill Presley
President and CEO at Gentherm

Conversely, we served hospitals through select partnerships, distributors, and GPOs, and we have zero access to the Veterans Health Administration today. There's a very, very strong cross-selling opportunity between those markets.

Ryan Sigdahl
Ryan Sigdahl
Analyst at Craig-Hallum Capital Group

That's great. Nice work, guys. It appears like the PT business keeps getting stronger by the day, and that acquisition feels even better as you progress towards close there. Nice job, guys. I'll turn it over to the others.

Bill Presley
Bill Presley
President and CEO at Gentherm

Thank you.

Jon Douyard
Jon Douyard
CFO at Gentherm

Thanks, Ryan.

Operator

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Nathan Jones
Nathan Jones
Analyst at Stifel

Good morning, everyone.

Bill Presley
Bill Presley
President and CEO at Gentherm

Hey, Nathan.

Nathan Jones
Nathan Jones
Analyst at Stifel

I will start with questions on the auto business. Obviously, you have outperformed your own outperformance targets relative to auto production here, with close to double-digit above-market performance in the quarter. I think you talked about mid- to high-single-digit for the full-year outperformance, whereas you have been talking about mid-single digits. Just looking for some more color on where in the world that outperformance came from, how sustainable you view that outperformance, and just any other information you can give us on where you are beating even your own targets in those markets.

Jon Douyard
Jon Douyard
CFO at Gentherm

Yeah, Nathan, if you look at growth, as we talked about, it is relatively broad-based across both products as well as regions from an outperformance perspective. We point to China being really strong, based on launches, based on increased take rates. It is really, I would say, broad-based. I think as we get to the second half of the year, you do run into some tougher comps that are impacting year-over-year growth rates. We have consistently said that this business can grow mid-single-digit over market over time, and we are very confident in the ability to do that based on the visibility that we have, as well as just the industry dynamics in terms of penetration and take rates or adoption. We would expect that mid-single digits. It might not be linear every single year.

Bill Presley
Bill Presley
President and CEO at Gentherm

Some might be a little higher or lower, very confident in the trajectory of the automotive business and the opportunity to grow there.

Nathan Jones
Nathan Jones
Analyst at Stifel

Okay, thanks for that. I guess a second question on the home and office business and the new customer wins there. I think you said these ones are in North America. I think previous wins have been at least with manufacturers in China. It's nice to see it broadening out there. Can you just talk about the materiality of it, how much it might add to revenue and what the trajectory is there? Any changes in targets by 2028 or estimates of what the TAM is here?

Bill Presley
Bill Presley
President and CEO at Gentherm

Yeah, Nathan, you're right. The first awards that we announced, and we were public with, were KUKA, and they're a Chinese-based manufacturer, one of the largest in the world. The other two that we've now added in North America are very large. They'll name us publicly before we can name, announcements will come out who they are, but they are quite large. What I would say is the wins with them were more sizable than what we had won with KUKA, but that's a result of them pulling more content quicker. KUKA's strategy was to be first to market with Gentherm. We anticipate that that will continue to expand. Overall, we're excited about the home and office market. Latest data that we have in talking to the manufacturers is the TAM in that market for us is over $500 million. The TAM is over $500 million.

Jon Douyard
Jon Douyard
CFO at Gentherm

We're still confident in that number that we put out there, $50 million-$100 million by 2028, but see no possibility of not being at least at $50 million.

Nathan Jones
Nathan Jones
Analyst at Stifel

Great. Thanks for taking my questions.

Bill Presley
Bill Presley
President and CEO at Gentherm

Thanks, Nathan.

Operator

Thank you. Our next question comes from the line of Rajat Gupta with JPMorgan Chase. Please proceed with your question.

Rajat Gupta
Rajat Gupta
Analyst at JPMorgan Chase

Great, thanks for taking the questions and congrats on the good execution here. It looks like the full-year guide range was primarily driven by the second quarter performance. I'm curious, is there some conservatism baked in in the second half yet, or are there any reasons that would suggest a slowdown in the organic growth cadence? Anything you can elaborate on that would be helpful. Just given the strong start to 2026, the strong bookings in the first half, would you be willing to update your original 2027 revenue guide at all? Thanks, and I have a follow-up.

Jon Douyard
Jon Douyard
CFO at Gentherm

Thanks, Rajat. In terms of the 2027 number, we are not in a position to update that at this point. I think we feel highly confident that we will be at the $1.7 billion or higher as we head into 2027. I think as you look at the second half of the year, you probably would not be the first person to call us conservative. There is certainly a level of uncertainty that is out there. We do have some of our runoff businesses, which has more of an impact in the second half of the year than the first half in terms of end of program on some of those product lines. That is a bit of a headwind. Based on the visibility we have, we are comfortable with where the midpoint guidance is at this point.

Rajat Gupta
Rajat Gupta
Analyst at JPMorgan Chase

Understood. That is helpful. Just on the, obviously the acquisition is due to close pretty soon. I am curious, as you have done more work and learned more about the business behind the scenes, any update to what the cross-sell opportunities might be, the synergies opportunities might be on the commercial side that you may have learned or has come up in recent months? Just curious if that pipeline has grown as you have learned more about the opportunity. Thanks.

Jon Douyard
Jon Douyard
CFO at Gentherm

I would say we have become very confident in our ability to capture the $100 million-plus that we talked about by 2030 in cross-selling. It goes back really to the three pillars we have talked about, right? Cross-selling into the other markets, opening up the India region for us, which we currently are not in today. As well as product development and integration between the two companies. Very confident in the $100 million-plus number. As you and I have talked before, over half of that will come up from the valves business, which is a business that we find very attractive.

Rajat Gupta
Rajat Gupta
Analyst at JPMorgan Chase

Understood. Great. Thanks for all the color, and good luck.

Jon Douyard
Jon Douyard
CFO at Gentherm

Thank you. Good talking to you.

Operator

Thank you. Our next question comes from the line of Glenn Chin with Seaport Research Partners. Please proceed with your question.

Glenn Chin
Glenn Chin
Analyst at Seaport Research Partners

Good morning, team, thank you, and congratulations. Yeah, congrats on the IME acquisition. Interesting that it's thermoelectric-based, as you mentioned, what the technology that Gentherm was born from. Is that to say pardon me for asking because I'm not an engineer, but I guess it's predicated upon the Peltier Effect, and that's basically the use of electric current to create cooling and heating?

Bill Presley
Bill Presley
President and CEO at Gentherm

That is correct, Glenn. It's based on the Peltier Effect the thermoelectric device either heats or cools the fluid that is flowed through the ThermaZone device. I get my thermos mixed up.

Glenn Chin
Glenn Chin
Analyst at Seaport Research Partners

Okay. Is that to say, could this have been developed in-house then, Bill?

Bill Presley
Bill Presley
President and CEO at Gentherm

Certainly the core technology is there to develop it in-house. We still have thermoelectric devices that we have, right? That we use for active heating and cooling. IME is a super strong fit for our core technology, super strong fit for our patient thermal management, which is based on thermoelectric devices. We're super excited about the cross-selling and our access now to the Veterans Administration and providing IME with access to our channels.

Glenn Chin
Glenn Chin
Analyst at Seaport Research Partners

Mm-hmm. Yeah, certainly sounds promising. Just searching for the device, and again, pardon me, I'm not a medical professional either, but it seems like there are a lot of competitor-type devices, and I say that somewhat loosely. Are these competitor-type devices competitive?

Bill Presley
Bill Presley
President and CEO at Gentherm

Certainly, they're competitive just by the nature of that they're competitive-type devices. I would say that IME has shown a strong growth trajectory and very strong market adoption. What's really interesting about this technology is it's pain management without opioids. Right? That's really the magic of the device is it provides that. We see a lot of potential in the market. We see a strong growth trajectory. Again, we're excited about taking this into our existing channels.

Glenn Chin
Glenn Chin
Analyst at Seaport Research Partners

Okay. Very good. Just a question on the margin performance. You guys cite higher warranty accruals in both automotive and medical. Is that due to higher incident rates, and is it something we need to be baking in going forward?

Bill Presley
Bill Presley
President and CEO at Gentherm

Yeah, I'll run right at that one. The reason we called that out and put that in there was because we don't want anything to mask the operational progress that we're making in the discipline. We had an instance on the auto side last year when we started setting up our key performance indicators and really started tracking things as a percentage of sales and driving numbers into the operations. We observed some trends in our KPIs that made us look at a product and make some mechanical robustness improvements in that product late last year. It's a very specific product with a specific customer. In the first half, we saw increased claims, and you'll see that this actually goes back to 2020.

Bill Presley
Bill Presley
President and CEO at Gentherm

We made the decision based on the robustness improvements we made last year, plus the trends that we saw to get this out in front of us and take the accrual. We don't view this as something that continues in the run rate.

Glenn Chin
Glenn Chin
Analyst at Seaport Research Partners

Okay. Very good. Thanks for the detail, Bill. That's it for me. Thanks.

Operator

Thank you. With that, this does conclude our question-and-answer session, as well as today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.

Executives
    • Gregory Blanchette
      Gregory Blanchette
      Senior Director of Investor Relations
    • Bill Presley
      Bill Presley
      President and CEO
    • Jon Douyard
      Jon Douyard
      CFO
Analysts
Powered by Quartr